The Royal Bank of Scotland Group plc

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The Royal Bank of Scotland Group plc

42 St. Andrew Square
Edinburgh EH2 2YE
United Kingdom
(031) 556 8555
Fax: (031) 557 6565

Public Company
Incorporated: 1727
Employees: 23,299
Sales: £293 million
Stock Exchanges: London
SICs: 6711 Holding Companies; 6012 Recognized Banks

Established in 1727, the Royal Bank of Scotland was the second bank started in Scotland. One of the largest banks in Scotland, the Royal Bank of Scotland also holds a significant position in the United Kingdom’s banking industry. Since the 1980s the bank has successfully diversified both in terms of product line and geography, having established a popular and profitable insurance business, Direct Line, and a growing American banking subsidiary, Citizens Financial Group.

After one failed attempt, the Royal Bank of Scotland was established on May 31, 1727. The first attempt to establish the bank came in the late seventeenth century when Scotland tried to improve its economic position with the so–called Darien scheme. The Darien scheme was a plan to establish a Scots trading colony, designed along the lines of England’s London East India Company, in Panama. With a population of only around 1,100,000 at the end of the seventeenth century, Scotland could not hope to raise the requisite capital alone, so the scheme’s architects relied on England for the bulk of their subscriptions. English investors, however, withdrew their money at the last minute when the English government realized that a successful Scottish venture could jeopardize the position of the London East India Company. Forced to finance the venture alone, the Scots raised £238,000 for the enterprise. Unfortunately, the entire sum was lost when the venture collapsed in 1699 due to difficulties with the heat, the Spanish, and outbreaks of fever.

The failure was devastating to Scotland, which had lost a quarter of its liquid assets in the disaster. Feelings ran so high against England for its lack of support that when the two countries were joined by the 1707 Act of Union, the English government deemed it wise to agree to pay compensation. The government provided for an “Equivalent” of £398,085 (and ten shillings) to cover the Darien losses and other debts, and allowed for an “Arising Equivalent,” which would be a percentage of tax revenue. Because only £150,000 of the promised money was actually available in cash, many Scottish creditors were given debentures bearing interest at five percent. Little of this interest actually materialized, however, until 1719, when an act was passed establishing an annual fund of £10,000 to be raised by Scotland’s customs and excise.

Organizations such as the Society of the Subscribed Equivalent Debt arose in both Scotland and England to aid in collecting the interest due, to buy more debenture stock, and to issue loans to members based on the value of their holdings. In 1724 these organizations were joined and regularized by Parliament to create the Equivalent Company. By 1727 this company, which was essentially acting as a bank to its members, chose to take the next logical step and officially become a bank. It was impossible to do so in England, where the Bank of England’s monopoly was firmly fixed, but the field was open in Scotland, where the monopoly of the Bank of Scotland, established by an act of the Scots Parliament in 1695, had expired in 1716. The Equivalent Company was granted a charter for banking on May 31, 1727, and was incorporated as the Royal Bank of Scotland.

The new bank opened in Edinburgh on December 8, 1727, with an authorized capital of £111,347 and a governor, a court of directors, and a staff of eight: a cashier, a secretary and his clerk, an accountant and his clerk, two tellers, and a messenger. It was a modest beginning but the new bank received a welcome boost in the form of £20,000 from the government, which chose that occasion to finally honor a commitment undertaken as part of the 1707 Act of Union, which provided for that sum to be lent out at interest for the development of Scottish fisheries and general manufacturing.

The Royal Bank learned to compete well against the Bank of Scotland and other banks as they were subsequently established. Circulation wars were an especially popular way of discomfiting the competition. At the time official government–backed banknotes did not exist; each bank issued its own, and a favorite ploy was to amass as many of a rival’s banknotes as possible and present them for payment all at once, causing frequent embarrassment and occasional temporary closures. Before long, however, an efficient counter–tactic was mounted when competitors demanded redemption of banknotes be paid entirely with sixpences. Eventually the practice died out.

Although the tricks may have been discontinued, the rivalry among competing banks remained. By the later eighteenth century the struggle for dominance shifted to Glasgow, Scotland’s second largest city, which was rapidly gaining prominence as a center for industry and commerce. Smaller banks had already sprung up there to satisfy new demand, and the big two, the Royal Bank and the Bank of Scotland, both Edinburgh–based, soon reacted to the threat of more competition. The Royal’s first Glasgow branch opened in 1783 and the bank became deeply involved in the city’s booming industries: the cotton trade, steam ships, sugar, and tobacco. Before long the Royal dominated the financial market in Glasgow; indeed, by the 1810s the bank’s Glasgow trade eclipsed its business in Edinburgh.

By the early nineteenth century a new threat faced the Royal and its arch–rival the Bank of Scotland. As large banking institutions whose clients tended to be big companies and very wealthy individuals, the two were perceived—and accurately so—as being removed from the interests of the general public. The average small customer’s banking needs were served by small private banks which in turn banked with the Royal or the Bank of Scotland. The system, which struck many as unsatisfactory, was changed with the arrival in 1810 of the new Commercial Bank of Scotland, which billed itself as “the Bank of the Citizens.” The new bank did well, having built up a branch network in Scotland of 30 banks by 1831, when it was granted a Royal Charter of Incorporation. The Commercial’s success was watched with interest, and other, similar banks soon appeared, most notably the National Bank of Scotland, incorporated in 1825.

Increased competition notwithstanding, the Royal continued to thrive as the nineteenth century progressed. As its success in Glasgow had proved, the bank was keenly aware of the opportunities afforded by the expansion of industry: in 1826 it financed Scotland’s first steam–powered railway, the first of several successful transport ventures. As the bank prospered it also expanded. By 1836 five new outlets had been established in Dundee, Paisley, Perth, Rothesay, and Dalkeith. The Royal Bank began a policy of aggressive acquisition, taking over many new branches after the 1857 failure of the Western Bank of Scotland and in 1864 acquiring the Dundee Banking Company. The Royal Bank also expanded its operations into England in 1874.

The Scottish banking community was shocked in 1878 when the City of Glasgow Bank spectacularly crashed: although the incident worked to the big banks’ advantage (they divided the unfortunate bank’s branches between them), it highlighted the need for limited liability and for a bank’s accounting practices to be audited by independent, professional accountants. The Royal Bank was already protected on the first score under the terms of its charter, but the Commercial and the National made haste to register under the Companies Act to prevent a similar misfortune befalling them.

The Royal increased its presence in England in the early twentieth century. In 1924 the bank acquired Drummonds’ Bank, a small but highly regarded London bank (whose clients had included George III and Beau Brummel) originally founded in 1717 by an expatriate Scotsman. Six years later the Royal acquired the Bank of England’s West End Branch and also Williams Deacon’s Bank, whose branch network in Manchester and the northwest provided the Royal with its first English presence outside the capital. The trend toward acquisition continued in 1939 with the addition of another private London bank, Glyn, Mills & Co. This bank and Williams Deacon’s continued to operate under their own names as subsidiaries, and together with their parent the Royal Bank were known as the Three Banks Group. As the bank grew it took advantage of technology. At this time the Royal Bank introduced telephones, typewriters, adding machines, and teleprinters. After World War II the bank founded a residential banking college to train staff for an increasingly sophisticated financial world.

By 1959 banking trends clearly favored consolidation. Scottish banks needed to match the financial might of their English counterparts if they were to be able to accommodate the needs of growing Scottish industry and commerce. Accordingly, the National and Commercial banks merged to form the National Commercial Bank, and in 1966 further strengthened their position by acquiring the English and Welsh branches of the National Bank. Three years later, however, the National Commercial Bank merged with the Royal Bank. The Scottish components of the new group were organized under a holding company, the National and Commercial Banking Group Ltd., and the English concerns, Glyn, Mills & Co., Williams Deacon’s, and the National Bank, came together as Williams & Glyn’s Bank Ltd., trading as such until 1985 when they adopted the name of the Royal Bank.

Greatly strengthened by the amalgamation, the group was ideally placed to take full advantage of the two watershed economic events of the 1970s. In 1971 the regulatory Bank of England eased restrictions on Scottish banks operating in England, allowing the royal Bank to compete freely for the first time. The range of financial services that banks could provide was also substantially broadened. Perhaps even more significantly, the rise of the North Sea oil industry in the 1970s proved an unprecedented boom to the Scottish economy and especially to banks, like the Royal, which were quick to recognize the tremendous potential of the new industry. Taking advantage of its new found strength, the bank expanded its foreign interests, establishing branches in New York and Hong Kong and opening representative offices in Chicago, Houston, Los Angeles, and San Francisco.

The 1980s began a time of expansion and diversification for the Royal Bank. In 1985 the bank created Direct Line, a telephone–based general insurance business. The subsidiary proved a runaway success, becoming the largest motor insurer in the United Kingdom. It soon offered household and life insurance. In 1988 the Royal acquired the Rhode Island–based Citizens, the fifth largest bank in New England, and promptly set upon a course of aggressive expansion in the region: as of 1994 Citizens Financial Group had added eight further acquisitions to its portfolio.

The tremendous success of Direct Line and Citizens led to speculation that the Royal would sell one or both of these subsidiaries, but there had been no indication that the bank had any intention of letting go of either profitable sideline in the early 1990s. In fact the subsidiaries played a fundamental role not only in keeping profits high but in protecting the group from fluctuations: if one sector of the Royal Bank’s business were to suffer a reverse, the others could carry the group for a time.

Although the bank describes itself as “conservative,” it is by no means fearful of creating and exploiting new opportunities. Its innovative use of technology is second to none in U.K. banking. Indeed, the Royal is, according to a commentator in the Herald, “setting a fast pace for the competition to follow these days.” In 1994 the bank introduced a 24–hour, seven–days–a–week telephone banking service, Direct Banking. Perhaps the bank’s biggest coup, however, is its creation of the Inter–Bank On–Line System (IBOS), a sophisticated cross–border banking system whereby funds can by transferred nearly instantaneously from the United Kingdom to IBOS member banks in Europe. The project grew out of a 1988 alliance with the Spanish Banco Santander and as of 1994 there were 3,500 IBOS branches in five countries, with many more planned.

With astonishing rapidity the Royal has been diversifying into new financial services, products, and initiatives. In 1994 the bank pioneered its new “finance shops,” which offered an extensive realm of mortgage and savings products to customers. The bank has also placed a new emphasis on credit card services, making this an independent operation. Also, the Royal established a specialist group to finance public sector projects in 1994. This innovative scheme has the blessing of the government and could include projects in transport and water management. The bank was also capturing an increasing share of the U.K. mortgage lending market, traditionally the province of the building societies. Indeed, in 1994 there was much speculation—confirmed by the Royal—that the bank intended to buy a U.K. building society when the right opportunity arose.

The bank’s successes were supported by its continual attention to its internal structure. In 1992 the Royal launched an ongoing Operation Columbus program, an initiative dedicated to streamlining operations through staff cuts and an increasing and more efficient use of automation. Simultaneously, in a bid to return to an older tradition of more personalized banking, managers throughout the branches have been freed from administrative tasks to allow them time to attend to their base of clients.

Clearly the Royal Bank of Scotland, old and venerable institution though it is, is far from moribund with age, as it enthusiastically entered a new era of its history. The bank’s aim for the future was an ambitious one; according to the company’s 1994 interim report: “We are on track to reach our goal of becoming the best performing financial services group in the United Kingdom by 1997.” Given the Royal’s historical and present record, this might not be an impossible dream.